PRODUCT DIFFERENTIATION AND ECONOMIC-GROWTH IN A SYSTEM OF CITIES

This paper adapts the Dixit-Stiglitz-Romer model of product diversity and monopolistic competition as a growth model for a Henderson-type system of cities with an overlapping generations structure. The life-cycle savings of individuals are invested in urban overhead and manufacturing capital. Each city specializes in the production of a single differentiated commodity. Land developers and city governments create new cities in line with the demand for differentiated products. Under the assumption of intracity and intercity locational equilibrium, we show that there exists a unique steady-state equilibrium, at which the number of cities exponentially grows at the same rate as population and the equilibrium city size is constant. The result that lifetime utility increases exponentially along the steady state is due entirely to the monopolistic competition structure of the model.